In this blog, we discuss the question of, “Is cryptocurrency a good investment?”. When the topic of cryptocurrency comes up, there has been a lot written lately that when you own Bitcoin or other similar holdings, you own “nothing.”

I respectfully disagree with that statement.

When you own a cryptocurrency, you own the belief that another buyer will eventually take it off your hands for more than you paid. And over the last year or so, that has been a winning assumption!

As the old adage goes, you never get something for nothing….

When I began my career as a financial advisor in 1983, the Baby Boomers had an affinity for gold after that precious metal had soared in value during the inflationary decade of the 70s. The story went something like this – the U.S. dollar was being debased by economic policy and gold was the only sure way to hedge that inevitability. There was only a finite amount of gold in existence, and mining companies were going to great lengths to harvest more from increasingly inhospitable places on Earth. Many newsletters at the time – the forerunner of today’s social media posts and also unregulated – argued for the price of gold to reach $10,000 an ounce or more.

Fast forward 39 years later, and although talk of using gold to hedge the U.S. dollar still exists while some money managers keep small positions in their portfolios, the reality is gold has been a terrible investment over the last 4 decades. Arguably its most prominent position now is in the teeth of rappers.

Which brings me to present day and my perception that the younger generations have found their “alternative investment” of choice – cryptocurrency.

You have to give credit to the still anonymous creator of Bitcoin for using the word “currency” and “mining” to describe what is really just a trade-able idea now carrying a market capitalization north of $2 trillion. In the case of gold, at least there was and is some industrial, jewelry, numismatic, and dental applications for that physical asset. When you own Bitcoin, or other nascent names like Ethereum or Dogecoin, you own nothing but the earnest belief that it will continue to escalate in price largely because other like-minded speculators are willing to pay more for it.

Can you make money in crypto?

In a concerted effort not to be that guy that yells at the neighbors’ kids to “get off my lawn,” I have tried to understand cryptocurrency from all perspectives. My tolerance is thwarted by a nasty little habit I’ve formed that expects an investment of any kind to produce future cash flow for its owner in some form or another. The value of cryptocurrencies seems to be based on the fervor of its community of online fans, not the present value of any future cash flow. All of the information I can find, from a wide swath of sources, has led me to the conclusion that cryptocurrency is a good investment, because above all it is not an investment but really a gamble. Albeit a gamble that has captured the fascination of even those who would never risk a nickel in a slot machine or on a craps table. It is certainly past the point where it can be ignored or dismissed out of hand.

For any of my clients who bother to ask, I’ve relayed my conclusion about cryptocurrency – it is not something we should even consider speculating in with hard-earned savings, where the purpose is to achieve goals and sustain retirement lifestyles.

So why write about it now?

This is a world where even a sniff of profit can bring out the worst in the financial services industry. And that includes not just the Robinhoods and Coinbases of the world, but also large firms responsible for the custody of trillions of dollars. And everyone seems to be jumping on the cryptocurrency bandwagon. Industry “white papers” are being issued by any number of financial firms, rationalizing why every investor should have a portion of their portfolio allocated to cryptocurrency. Investment managers are tripping over themselves creating any number of “actively managed” investment vehicles to take advantage of this “investment opportunity” – now we even have exchange traded funds (ETFs) being offered to capture the crypto craze. $700 million to re-name the Staples Center and $7 million for 30 second Super Bowl ads continue to sound the alarm in my head.

Is cryptocurrency a good investment? Our concluding thoughts

The purpose of this newsletter is to clearly reiterate our stance: we’re not joining the crypto party, for all the reasons above and most of all because history tells us that parties like this don’t end well. It is of highest importance for clients to adopt an attitude of unmitigated prudence and caution on this matter. We advise you to stay away from cryptocurrency in all forms, whether investing in it, trading it, or even using it as a medium of exchange.

If you wish to discuss this or any other aspects of your plan or portfolio, please let us know.

-Andy

Rosen, Judy. (2022, February 2nd). The New York Times Magazine. Why Is Matt Damon Shilling for Crypto?

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